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Large Users Feel That Bypass Issues Don't Reflect Reality.

Who better to explain the potential impact of bypass technologies than the people who would most likely to use them? Are large telecom users finding advantages in bypass services now? Do they plan to use them in the future? If so, why? If not, why? A lot of people would like to know, including the FCC. After the commission issued Public Notice 3206 at the end of March in an attempt to assess the "extent and dangers" of bypass, the International Communications Association polled its members (who collectively spend more than $15 billion per year on telecom systems and services) to see what they're doing, or not doing, with bypass.

According to ICA's findings, there is "no bypass problem that endangers carriers or universal service, either now or for the foreseeable future. Nor, for the same reason, are drastic changes or new directions in US telecommunications policies required to deal with the alleged 'bypass threat.'"

As far as ICA is concerned, the survey results demonstrate that customer bypass is, in fact, "a less significant factor in the overall telecommunications industry than has been previously asserted, which can be recognized and limited by public policy initiatives that already have been undertaken by the FCC. The initiatives generally fall into two categories: creating mechanisms to limit the imposition of non-economic subsidies within the pricing of common carrier telecommunications services (where subsidies required to realize the positive externalities associated with continued 'universal service' are recognized as having a valid economic foundation); and creating incentives for existing telecommunications common carriers to improve the quality and reliability of the services and facilities that they offer to large business users. Because the ICA survey results demonstrate that customer bypass is not a pervasive or threatening phenomenon, policy makers should be able to focus attnetion on actions and programs that amount to a 'fine-tuning' of the current environment, and to discount ambiguous statistics or anecdotal information concerning bypass."

The survey shows that, among other things, use of bypass facilities is not perceived as a significant opportunity by most ICA members. Some 29 percent of those surveyed now use some type of bypass facilities, while 60 percent said that the use of bypass facilities would not provide an adequate option for most users at most locations, and two-thirds of those even considering bypass have not reached a decision stage requiring major economic commitment (construction or capital budgeting).

Equally important, says ICA, the most frequent reason cited in the survey for bypass "is the limit in the quality and availability of existing carrier services; it is not, as often assumed, cost savings. Bypass due to service quality and availability problems, however, may become more pronounced in the future, given the seemingly chronic inability of the Bell operating companies and AT&T to correct the increasing backlog of service problems faced by many users. The irony of this is that the carriers themselves may be creating incentives for bypass."

In summary, the ICA told the FCC that "the solution to the alleged 'bypass problem' lies not in adopting drastic new regulatory policies or requirements; rather, what is required is a continued commission commitment to the timely implementation of its existing, carefully developed policies."

the survey, compiled and analyzed by ICA's regulatory policy consultants, Economics and Technology of Boston, used a 10-page questionnaire that was mailed to all ICA voting members (the one person designated within each member organization to be the lead representative to ICA). ICA membership consists of something over 500 organizations, and each received a copy of the questionnaire; however, only about 470 qualified as the base population of the survey, because the remaining members are located outside the US and use few domestic US telecommunications resources. Data was compiled from 187 survey responses. The respondents were required to consider between 88 and 175 itemized answers in order to ascertain the applicability of, and to complete, portions of the questionnaire.

Explaining some of its methodology for the survey, ICA noted that "great care was taken to ensure the validity and usefulness" of its survey results. "In defining bypass, for example, ICA has sought to avoid the errors of many other recent bypass polls, which use overly broad, often self-serving definitions. Thus, the ICA survey focuses on the existing use and future planning for customer-provided communications systems (CPCS). The term CPCS is meant to be generally synonymous with the phrase 'customer-provided equipment' as it was used in the early years of terminal equipment interconnection. CPCS is defined to exclude intra-premises, local-area-network-type communications facilities, as well as bypass facilities that might be offered by another carrier in competition with the carrier providing the displace transmission service. The exclusion of these communications systems is significant in this contect."

ICA says the exclusion of intra-premises and intra-building communications systems (customer-provided local-area networks) was intentional, because several ICA members had reported that other polls in which they were asked to participate contemplated that any communications system, including one that might link two or more word processors within the same building, for example, should be considered as "bypass" technology. ICA says, "Such definitions of bypass only serve to confuse issues related to the pricing of local access or intercity services with those dealing with internal wiring that is undertaken by customers." Important to Have Clear Picture

According to ICA, the bypass issue should be confined only to telecommunications links that use common carriers' extensive capital investments in outside plant, subscriber loops and trunk equipment; "it should not be intermixed with regulatory rulings that, in effect, allow customer activities that are no different than installation and use of electrical wire and conduit. The broader definition of telecommunications bypass would suggest, by analogy, that any customer electrical wiring that was not installed and serviced by the local electric utility company 'bypassed' the electric distribution grid. Similarly, the inclusion of carrier-provided bypass systems in the survey would have resulted in a misleading picture of bypass."

Among some of the survey's key conclusions, in addition to those mentioned earlier, were:

* Most CPCS is analogous to LATA private-line services, but represents a larger capacity component than has historically been offered by carrier tariffs. The "typical" CPCS covers a distance under eight miles; contains bandwidth of about 500 voice-grade channels, of which more than 200 are currently used; and is used principally for data, mixed voice and data, and videoconferencing.

* Use or consideration of CPCS is not a function of the size of the respondents' annual telecommunications budget, and is not concentrated among the larger users. The smaller the annual expenditure, however, the more likely was a CPCS to replace LATA carrier services, rather than interLATA offerings, or to be viewed as not replacing any common carrier tarified service. The rate of deployment of both LATA and interLATA systems has increased in recent years, but has not exhibited markedly high growth.

* More users cited limits in the quality or availability of existing common carrier services than significant cost savings, in support of either existing or potential deployment of CPCS. The non-availability of common carrier services was a more important factor for the past deployment of CPCS than for potential, future use of such systems. However, the increasing, unprecedented service problems being encountered by users could cause a user movement toward bypass.

* The percentage cost savings reported by most respondents may be less than common carrier rate increases either placed in effect in recent years or proposed. The upper end of the range of cost savings either realized or anticipated by users may exceed the value of carrier rate increases or proposed additives on CPCS. At the other end of the range, cost savings do not appear to have motivated deployment of CPCS, except as the users perceived benefits from increased cost stability and certainty.

A number of times, ICA pointed to "serious deficiencies" of some industry-sponsored bypass polls, which "consistently base their conclusion that bypass is a major problem merely on the fact that a private user may 'consider' bypassing. Of course, sound management requires that all options be 'considered.' So, too, sound management requires that significant capital expenditures not be incurred without fully weighing the pros and cons of such a decision. Thus, it is not surprising that the ICA survey shows that an organization's mere 'consideration' of bypass does not inevitably mean bypass will occur."

The survey questionnaire tested whether the ICA members were prepared to use new common carrier-provided systems that could bypass the facilities of existing suppliers of telecommunications transmission through a question concerning planned use of "Digital Electronic Message Services (DEMS)." More than 90 percent of all respondents answered the question. They were to have checked as many lines as apply to their company today. Questions, with the responses in parentheses, were: Have you been contacted by one or more potential vendors? (31 percent said they had); Have you evaluated the financial or technical results expected from installing DEMS? (9 percent have); Have you placed an order for design or installation of DEMS? (one percent have); None of the above? (66 percent).

The survey asked respondents to classify systems and expenditures as "interLATA" of "intraLATA" in order to recognize the new territorial structure that resulted from the AT&T divestiture and the business separation between the BOCs and AT&T. In addition to explaining the new distinction, the questionnaire included a map of the United States showing each of the LATA boundaries approved by Judge Harold Greene. A Broad Profile

The ICA respondents represented a broad profile of American business, institutional and government telecommunications users, ranging from aerospace to utilities. The largest numbers included manufacturing (21) and banking (19). Asked for the principal states in which they conduct business, the largest responses said California (59 percent), New York (56 percent), Texas (45 percent), Illinois (37 percent), Pennsylvania (23 percent), Florida (23 percent) and New Jersey (21 percent).

Distribution of their corporate telecommunications expenditures showed that 73 percent goes for voice, 23 percent for data and four percent for "other." Noting that a similar question asked of ICA members in 1978 resulted in respective percentage of 70, 21 and 9 percent, ICA observed that "it is useful to note that the relative shares of voice and data traffic have remained stable during the six-year period; some press discussions of bypass appear to suggest that a marked increase in the growth rate of data communications explains the rapid growth in customer-provided systems. Neither growth assumption may be accurate."

One of the charts shows the distribution of the respondents by the value of their individual annual expenditures on telecommunications services. A number of other survey responses were distributed according to the size classifications shown in the figure, in order to determine whether the total size of a firm's expenditures affected either its evaluation or use of CPCS.

The survey questionnaire was designed to group respondents into two broad categories of users who already operate customer-provided communications systems (CPCS), which are referred to as "existing systems," and users who may have entered some stage of consideration of a CPCS that is not in operation, referred to as "potential systems." ICA noted that potential systems can, in some cases, be further divided into CPCS that are likely to be constructed and those with a lower probability of actual deployment at this time. Potential systems under consideration were grouped into four categories of activity involving financial and economic evaluations of future CPCS, engineering analyses (activities such as radio-frequency coordination, site or right-of-way evaluation and other steps necessary to design a CPCS), inclusion of CPCS in corporate capital budgets and actual construction of a CPCS.

According to ICA, the higher probability that a potential CPCS will be installed, in fact, is associated with the latter two activities. "Clearly, actual construction indicates that a potential system will be placed in service. Moreover, including a potential system in a user's capital budget should be viewed as a threshold test of significant probability that a system will be deployed. The commitment required to undertake either financial or engineering analyses of a CPCS is significantly less than the commitment required to place such a system in the organization's budget. Numerous financial or engineering analyses may be made of many changes or additions to a user's telecommunications systems in the ordinary course of business. However, the survey results demonstrate that capital budgeting decisions are more complicated."

The respondents indicated that existing CPCS accounts for only a small fraction of existing telecommunications demand. Asked to estimate what percentage of their company's use of United States domestic transmission services of all types is carried by interLATA common carriers, intraLATA common carriers and customer-provided systems, the respondents said 62, 33 and 4 percent, respectively.

According to ICA, the results for LATA and interLATA traffic are generally correlated with the results of the 1978 member survey (in which, of course, the use was not disaggregated by the new LATA classifications). In 1978, about 55 percent of user demand was classified as "interstate" and 40 percent was "intrastate." ICA says the percentage shifts in the 1984 survey may be associated with traffic that is intrastate but interLATA. Twenty-nine percent of the respondents submitted a non-zero response to the third alternative (customer-provided systems); in these responses the total use of CPCS rose to an average of less than 15 percent.

ICA says that the 15 percent share carried by these systems "somewhat overstates the relative penetration of such systems in the overall telecommunications networks of the respondents." The ICA members were asked to detail the number of discrete transmission systems that they operate. This specific question did not differentiate between existing and potential systems. The median number of point-to-point systems reported was 2.4; the average was 3.1. (The question allowed the respondents to list a number of point-to-point CPCS up to 10; only two respondents [three percent] listed nine or more systems). According to ICA, this number of point-to-point systems "is likely to represent an extremely small percentage of the local access and dedicated lines employed by any telecommunications user with an annual budget in excess of $1 million. Thus, while the share of telecommunications traffic carried on the systems of the 29 percent of ICA members who employ such systems is about 15 percent of their total usage, the number of common carrier circuits that would be employed for this traffic (assuming adequate offerings were both available and cost-effective) is a much smaller proportion of the users' total demand." The Expenditure Factor

The results showed that the relative distribution of the respondents' use of interLATA or intraLATA common carrier services did not vary significantly by the value of the organization's annual telecommunications expenditures, within the categories illustrated in the first chart. Likewise, expenditures did not affect the distribution of CPCS use among all respondents, because, as noted, more than 70 percent reported no CPCS. However, when CPCS users reported what type of common carrier services were replaced by existing CPCS, the value of telecommunications expenditure affected this distribution.

These respondents now operating customer-provided systems were asked to estimate the percentage of point-to-point systems that serve two replacement functions, if any, compared with services provided by a telephone company common carrier. Some 37 percent said these systems replace primarily local services, while 33 percent said they replace primarily interLATA services, and 30 percent said none of the above.

"In other words," noted ICA, "utilization of existing CPCS is not a phenomenon that can be associated particularly with replacement of either local or toll common carrier services. Almost one-third of the responses indicated 'none of the above' to this question, and 18 percent of the respondents checked only this choice. This is an indication that the non-availability of service or other qualitative factors influence use of CPCS."

A large majority of the common carrier services reported to be replaced by existing CPCS were private-line service; dial-up switched service accounted for less than 26 percent of the replaced common carrier services where this differentiation was reported, which ICA says confirms that "CPCS largely are analogous to common carrier private-line services."

This question produced the most marked differences among respondents classified by size of telecommunications expenditure (see chart). ICA points out that the degree to which local common carrier offerings were replaced varied inversely with the size of the organization's telecommunications budget; smaller users reported far more local service replacement than larger users. Smaller users also were more likely to answer that an existing CPCS replaced neither local nor interLATA common carrier services. Conversely, the larger the user's outlay, the more likely it was to report that an interLATA common carrier offering was replaced.

ICA says that the higher relative frequency with which smaller users report that CPCS either replaces intraLATA common carrier services or provides communications functions that replace no common carrier service may be attributed to the fact that "smaller users are more likely to have most of their telecommunications requirements concentrated in a few locations. Larger users' requirements are more dispersed nationally and, hence, utilize relatively more interLATA facilities."

It adds, "However, the concentration of responses reporting either that a LATA carrier's services were replaced, or that, in fact, the existing CPCS is not viewed as a substitute for services available from a LATA carrier, shows a correlation between installation of exisitng CPCS and the pricing and service quality offered by LATA carriers. This condition is confirmed by the relative distribution of the overall distances of discrete point-to-point CPCS reported by the survey respondets"--up to 16 miles, 55 percent; 16.1 to 200 miles, 24 percent; and over 200 miles, 22 percent.

ICA explains that most transmission routes spanning 16 miles or less are likely to fall within a single LATA, and typically have been provided by a single common carrier rather than by a partnership of carriers, such as the previous affiliation between AT&T Long Lines and the BOCs. "Thus, some analysis of the bypass issue might focus on the conditions surrounding relatively short-haul LATA common carrier transmission services."

Looking at the age of existing customer-provided systems, the survey found that 30 percent were installed before 1978, 36 percent between 1978 and 1982, and 34 percent since 1982. No Recent Phenomenon

According to ICA, "While a somewhat higher rate of deployment of CPCS may be inferred from the percentage installed since 1982, the results indicate that utilization of CPCS is neither a recent phenomenon nor an especially explosive one. As one should expect, the technology mix of existing systems changed over time. Fixed microwave systems declined as a percentage of all reported systems, from 70 to 46 percent, while newer technology fiber optics increased in share to 18 percent in the latter period. The conclusion that the growth of CPCS is not now surging is generally confirmed by the analysis of survey results concerning users' planning for potential new CPCS."

As mentioned earlier, 53 percent of the survey respondents reported that they were in some stage of evaluating potential CPCS. Concerning the status of their evaluations, 43 percent said the systems are being evaluated for financial effects, 22 percent said they're being engineered, 24 percent said they're included in current capital budgets and 11 percent said the systems are under construction (more than one response could be checked).

Respondents also indicated the technologies that might be used for such systems. Nearly all were evaluating private microwave systems, approximately one-third checked fiber optics and one-fourth listed dedicated satellite earth stations. Fewer than 20 percent specified coaxial cable or cable-TV facilities as a potential medium subject to evaluation. No Single Technology

ICA points out that respondents could check as many different technologies as they wished. Some 53 percent checked two or more technologies, while 30 percent indicated three or more types of transmission. "Considering that most users of existing CPCS operate less than three systems today, the number of different technologies reportedly being evaluated suggests, grain, that most companies that are even considering potential CPCS are not committed to one technology or to actual installation of one technology."

ICA also points out that "the respondents also demonstrated that development of potential CPCS is not likely to reflect sharing of such systems among several business users. The survey tested whether the evaluation of potential systems might be related to the economies or improved utilization of CPCS that could be realized by inter-company sharing (with another unaffiliated, non-telecommunications company)." Some 88 percent said they have no such plans, five percent said they expect to have plans with one other company, none said they have plans with two companies, while eight percent said they have plans to share with more than two companies.

Among the reasons given by respondents for not evaluating any customer-provided transmission system at this time were: 16 percent felt their company was too small for such a system; 37 percent felt thei roperations were too diverse; 45 percent didn't feel it would be cost-effective; 24 percent were satisfied with the quality and reliability of common carrier services; 13 percent said they haven't been approached by vendors; and 17 percent answered with other reasons. ICA points out that no organization with an annual telecom bill in excess of $35 million checked either "too small" or "have not been approached."
COPYRIGHT 1984 Nelson Publishing
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Publication:Communications News
Date:Jul 1, 1984
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